Financials take a heavy hit, led by Bank of America

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Bank of America ( BAC ) shares plunged 20 percent in Monday trading, dragging other financials like Citigroup ( C ) and Wells Fargo ( WFC ) down.

The rout took place against a backdrop of generalized panic in financial markets, with the Dow Jones Industrial Average dropping around 600 points by the close and the NASDAQ off more than 155 points. 

Bank of America was hit by a confluence of events. First, the Standard & Poor's rating agency downgraded the United States from its top-level AAA sovereign credit rating by one notch to AA+. S&P has been heavily criticized both for its role in handing AAA ratings to toxic mortgage-backed securities during the real estate bubble and for this most recent decision. The agency cited several factors, including the miserable state of U.S. policy making, a reluctance to raise revenues and prolonged economic weakness, in its decision to downgrade the U.S.

The Treasury Department responded  by pointing out a fairly large - $2 trillion - discrepancy in the agency's calculation of its 10-year projection for total local, state and federal debts as a share of GDP. The loss of the AAA rating is bad news for Bank of America both because it hurts the economy and because the downgrade was soon extended to Fannie Mae and Freddie Mac, throwing doubt on the whole structure of U.S. mortgage lending.

In addition, the bank revealed that American International Group, the insurance giant which helped kickstart the crisis in 2008 after it effectively imploded under the weight of its obligations, is suing Bank of America for $10 billion in losses sustained as a result of toxic mortgage securities. 

The combination proved too much for investors, who have taken off 40 percent of the company's value since the beginning of July. It's a massive hit, though the bank has arguably been defying criticism with aplomb for quite some time.

Tuesday should be an interesting day in the markets - particularly for the major financials, as Bloomberg reports that banks around the world are set to cut over 100,000 jobs.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , Banking and Loans , Stocks

Referenced Stocks: BAC , C , WFC

Daniel Pereira


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